Buy a franchise restaurant or mom and pop restaurant?
I am doing a research for my business administration class regarding my topic of “franchise vs. mom and pop restaurants”. I know that franchise’s negative side is the royalty fee but has name recogniztion. Mom & pop restaurant doesn’t have name recognition but no royalty and can do whatever they want. Is there any other issues or points? If you had money to buy either one, which one would you buy and why? Thanks for your input and help!
Popularity: 1% [?]
Permalink for Buy a franchise restaurant or mom and pop restaurant?
fanofmawson said,
June 7, 2010 @ 9:17 pm
Some information that may help you formulate your own opinion:
In your research, odds are good that you’ll come across a claim something along the lines of “If you buy a Franchise Business, your chances of success are 94%! THAT’S A FACT, according to a recent Gallup poll. Conversely, it’s estimated that only 35% of
independent business start-ups survive 5 years.” Variants of this claim are common among franchisors, however, the FTC found this statement to be “false and a misrepresentation”. Here’s a link to their website where you can find this:
http://www.ftc.gov/opa/1995/09/bexpo.htm
Casting further discredit on the “95% succeed” figure are the annual turnover rates of franchise outlets. These range from 10% to 19% across industries, with the exception of the “Baked goods” industry with 50.5% annual turnover. The overall annual turnover rate is 16%.
Some other information you may find helpful:
Most franchise contracts are 10-year commitments for which the franchisee has virtually no rights. They’re structured such that the franchisee has very little latitude or say in how the business is operated. You have flexibility to hire your staff, manage them and set your own prices, but most everything else, from displays to products you may/may not carry to signage/advertising, equipment, technology, etc. is usually either governed by or subject to the approval of the franchisor. It’s not like owning your own business, it’s more like being a store manager who, if the business is profitable, takes home most of that. And if the business is not profitable and you want to sell it or close it after five years, these are both very difficult to do. The former is usually via either a very large fee (an example is a local franchisee who paid $100,000 to terminate his franchise contract with one of the more popular women’s fitness center franchises) or personal bankruptcy (franchise contracts generally require you that you be personally liable your business debts, not just through whatever type of corporate entity you might establish; e.g., LLC, S Corp., Partnership, etc.). The latter option of selling your franchise is generally accomplished only at a very large discount.
These are facts. I offer them not with the intention of saying that all franchises are bad, but rather to convey an opposing view from all of the positive spin put forth by the franchising industry. There are many very happy, wealthy franchisees out there, but it’s not a guaranteed formula for success. Every opportunity is unique and requires extensive due diligence of both the franchise itself as well as the regulations governing the industry.
Good luck!